Start the savings or pay down my student loans?

[FlamingRug]

I was wondering if anyone could tell me what would be the best course of action in my situation. I graduated school last year with a mound of student loans (~150,000). I have a good job and have started thinking about saving for the future. My company has a 401K match program, but it will not start until i have been with them for a year. I was wondering if it would be prudent to start paying into it now, even with the economy how it is, without a match, or if the money would be better spent in paying down my loans faster.

My feeling is that paying down my debt faster at the moment is the better investment, at least while there is not company match. I will essentially be getting a rock solid guaranteed 6.8% rate of return (the highest interest rate on my loans). Meanwhile, a 401K could lose money in the current economic times couldn't it?

Something i haven't though much yet is some sort of high-yield savings account, would anyone advocate this approach at this time?

Anyways, thanks in advance for any help!

[jIM_Ohio]

Post more info, please.

Post your gross salary, net salary and monthly budget.

In general put a significant amount to 401k or retirement
Put some towards short term savings and debt repayment.

[disneysteve]

As Jim said, we need more info.

Personally, I don't think debt repayment and savings need to be handled separately. I think you should be doing both at the same time.

Meanwhile, a 401K could lose money in the current economic times couldn't it?

That depends on how you invest the money. You could put it is something that wouldn't lose money, like a money market fund, if you were really averse to losing principal (which you shouldn't be if you are young and have lots of years ahead of you).

[FlamingRug]

Gross pay: $122,000/yr
Net: ~$80-90,000/yr
Approximate budget: $1,700/month (includes minimum loan payment)

I am used to living like a college student, and I still do. I really would prefer to save and/or pay my debt down rather than allow my lifestyle to reflect my income. I would really appreciate advice on how to strike the proper balance between the 2 as well as the right balance for asset allocation based on risk for my age (26 y/o). At the moment being relatively unsure of how to spread out my money I am paying around triple my monthly loan payments (extra all towards my highest interest loans). At the moment I have only a checking account.

Thanks for the responses so far, and for any further advice!

Nick

[disneysteve]

Originally Posted by FlamingRug

Gross pay: $122,000/yr
Net: ~$80-90,000/yr
Approximate budget: $1,700/month (includes minimum loan payment)

I am used to living like a college student, and I still do. I really would prefer to save and/or pay my debt down rather than allow my lifestyle to reflect my income. I would really appreciate advice on how to strike the proper balance between the 2 as well as the right balance for asset allocation based on risk for my age (26 y/o). At the moment being relatively unsure of how to spread out my money I am paying around triple my monthly loan payments (extra all towards my highest interest loans). At the moment I have only a checking account.

Kudos for the part I bolded! So many young people (and older people, too) simply don't get that concept. if you have been living on $30,000 and suddenly start making $60,000, for example, there is no reason why you need to double your spending. That puts you no better off than you were before.

What I've always done when my salary increased or my expenses dropped freeing up cash was to put a small portion of it toward spending and putting the rest toward increased savings. For example, when we finished paying off our home equity loan (monthly payment $218), we upgraded our texting plan ($25) and put the remaining $193 toward savings.

You've been living lean out of necessity. It can be a bit harder to keep that focus when you no longer have to, so cut yourself some slack. Figure out where spending a little more would give you the biggest bang for your buck. Maybe eating out a couple more times each month is important to you. Maybe you'd like more cable channels. Maybe some of your wardrobe needs upgrading. Pick a couple of things to spend on that will keep you from feeling like a starving college student. There is nothing at all wrong with spending some of your newly higher income.

The rest goes to savings and debt repayment. Do you have an adequate emergency fund? With monthly expenses of $1,700, 6 months is $10,200.

Even though you aren't yet eligible for the 401k match, I think it is important to get in the habit of saving and getting used to living without that portion of your income. Plus there is the tax savings to consider. Another option (and I'm not sure which is best) is to contribute to a Roth for now until you are eligible for the match.

[maat55]

I would build an 3 months expenses EF.(high-yield savings)
Invest to the match in your 401k
Pay down debt.
Once debt is gone:
10% into roth
10% misc. fund (downpayment, auto, etc.)

[isthisused]

Originally Posted by FlamingRug

I was wondering if anyone could tell me what would be the best course of action in my situation. I graduated school last year with a mound of student loans (~150,000). I have a good job and have started thinking about saving for the future. My company has a 401K match program, but it will not start until i have been with them for a year. I was wondering if it would be prudent to start paying into it now, even with the economy how it is, without a match, or if the money would be better spent in paying down my loans faster.

My feeling is that paying down my debt faster at the moment is the better investment, at least while there is not company match. I will essentially be getting a rock solid guaranteed 6.8% rate of return (the highest interest rate on my loans). Meanwhile, a 401K could lose money in the current economic times couldn't it?

Something i haven't though much yet is some sort of high-yield savings account, would anyone advocate this approach at this time?

Anyways, thanks in advance for any help!

definatly pay down the debt until the match begins, then contribute at least enough to get the match. the match will get you a 50-100% return instantly and that is a much better gain than the interest you save.

[jIM_Ohio]

Originally Posted by FlamingRug

Gross pay: $122,000/yr
Net: ~$80-90,000/yr
Approximate budget: $1,700/month (includes minimum loan payment)

I am used to living like a college student, and I still do. I really would prefer to save and/or pay my debt down rather than allow my lifestyle to reflect my income. I would really appreciate advice on how to strike the proper balance between the 2 as well as the right balance for asset allocation based on risk for my age (26 y/o). At the moment being relatively unsure of how to spread out my money I am paying around triple my monthly loan payments (extra all towards my highest interest loans). At the moment I have only a checking account.

Thanks for the responses so far, and for any further advice!

Nick

good info... based on 122k gross, plan to save 14k per year (20 percent). 4k to savings, 10k to retirement

If you put most of that 10k in 401k, your take home will only go down 8k or so.

[isthisused]

Originally Posted by disneysteve

As Jim said, we need more info.

Personally, I don't think debt repayment and savings need to be handled separately. I think you should be doing both at the same time.


That depends on how you invest the money. You could put it is something that wouldn't lose money, like a money market fund, if you were really averse to losing principal (which you shouldn't be if you are young and have lots of years ahead of you).

I would agree about the safety of the money market in the short term. But I wouldn’t consider it for the long term. Though it might grow in the number of dollars, it may not keep up with inflation. So in effect it will also lose money. At your age the market will most likely recover not just once, but it will recover then lose then recover ect ect.. If you are in it for the long hall the growth is in stocks. You should look to own 70% on stock funds with the rest in bonds. .
I agree with the other poster about the emergency fund. I had forgot about that when I posted earlier. I also agree that opening a Roth would be better than an unmatched 401k.assuming you qualify.

[swanson719]

I would put $15,000 into a money market as an emergency fund first. When you leave Murphy a door, he will come in. Once that is done, I agree that you could raise your spending by $500 a month and still be fine. Not saying you have to. In the mean-time, max out a Roth IRA instead of a 401K until you get the employer match. This will take about $5,300. The Roth takes $5,000 and you will usually pay 5.75% to the company holding it, which comes out to about an extra $300. After that is done, you will still have $40,000 roughly to pay down you debt this year. I would pay down the debt aggressively until it's gone, while maxing out your Roth and taking the match in the 401K. Will probably take 3 years to pay off the student loans if you invest this way and live the same lifestyle you are now. If you keep it up for another 3 or 4 years after that, you could buy a house in cash. Wouldn't that be nice? 33 years old, having no debt, a house paid for in cash, a $15,000 emergency fund, and be investing? Imagine how much you could put into your 401K annually then. Not to mention if you were to get married and have a double income. Kids wouldn't be an issue financially because you wouldn't have anything else to spend money on.

[isthisused]

[quote=swanson719;209391]I The Roth takes $5,000 and you will usually pay 5.75% to the company holding it, which comes out to about an extra $300. After that is done, you will still have $40,000 roughly to pay down you debt this year. QUOTE]



Ouch! 5.75% that seems really high. how about no load funds or ETFs

[disneysteve]

Originally Posted by swanson719

In the mean-time, max out a Roth IRA instead of a 401K until you get the employer match. This will take about $5,300. The Roth takes $5,000 and you will usually pay 5.75% to the company holding it, which comes out to about an extra $300.

Why would anyone in their right mind open a Roth with a firm that charges a 5.75% load when they can do the exact same thing for free?

[isthisused]

Originally Posted by disneysteve

Why would anyone in their right mind open a Roth with a firm that charges a 5.75% load when they can do the exact same thing for free?

Some people pay $40 fo a hair cut and others pay $12 and some get one for free.. Where can you open a Roth for free?

[Rainelli]

well think of the best way,which is much important.

[disneysteve]

Originally Posted by isthisused

Where can you open a Roth for free?

Hundreds of places like Vanguard, Fidelity, T. Rowe Price, Janus, Heartland, Dodge & Cox, Baron, Pimco, Marsico and lots of others. You can also open a Roth account with a broker like Charles Schwab and have access to over 2,000 no-load mutual funds with no transaction fees.

It isn't "free" since the funds still have expense ratios but there is no load and no transaction fees or commissions.

[Exile]

Concentrate on paying off your student loan with 75% of the funds in question and set aside the remaining 25% in a Roth IRA. I would forget about a 401(k) for now unless there's a fund in the portfolio that is FDIC insured. If that's the case then place the 25% there instead.

[jIM_Ohio]

Originally Posted by isthisused

I would agree about the safety of the money market in the short term. But I wouldn’t consider it for the long term. Though it might grow in the number of dollars, it may not keep up with inflation. So in effect it will also lose money. At your age the market will most likely recover not just once, but it will recover then lose then recover ect ect.. If you are in it for the long hall the growth is in stocks. You should look to own 70% on stock funds with the rest in bonds. .
I agree with the other poster about the emergency fund. I had forgot about that when I posted earlier. I also agree that opening a Roth would be better than an unmatched 401k.assuming you qualify.

Doing the Roth over the 401k might be OK investing advice, it is TERRIBLE tax advice.

Based on income of 122k, the 401k should be your top choice for efficient investing and efficient taxation. You are paying 25% or 28% in taxes now (are you married or single?). Investing pre-tax allows you to save more and pay less in taxes.

This advice assumes you spend less than you earn, and that no HUGE raise is coming your way anytime soon (40k in raises and this advice changes probably).

[simpletron]

I just want to double check this, you net ~7-8K/month and your expense + min debt payments is ~ 1700, so you have ~5-6K extra per month, right? if this is true I would max out the 401K and get in the habit of doing that every year. it is not like it will really slow down paying off the student loans much. and after you payoff the student loans, what's next? you can't contribute more than the max to 401K or contribute more for earlier years. if you say a taxable account, the additional taxes over a lifetime(compare to the 401K) will be more than the additional savings in interest from not doing the 401K.

[disneysteve]

Originally Posted by jIM_Ohio

Doing the Roth over the 401k might be OK investing advice, it is TERRIBLE tax advice.

Investing pre-tax allows you to save more and pay less in taxes.

Jim, you may or may not be correct, but there is no way to know. I've read numerous articles, as recently as this morning, that stress how we are currently paying historically low tax rates that can't possibly last given the financial picture, the trillion dollar deficits, bailouts, stimulus plans, etc. As a result, many advisors recommend Roth IRAs and Roth 401ks as the preferred investment choice for most workers.

I know we can only plan based on currently available information. I just wanted to toss out an alternate point of view.

[jIM_Ohio]

Originally Posted by disneysteve

Jim, you may or may not be correct, but there is no way to know. I've read numerous articles, as recently as this morning, that stress how we are currently paying historically low tax rates that can't possibly last given the financial picture, the trillion dollar deficits, bailouts, stimulus plans, etc. As a result, many advisors recommend Roth IRAs and Roth 401ks as the preferred investment choice for most workers.

I know we can only plan based on currently available information. I just wanted to toss out an alternate point of view.

Steve- we have gone thru this before- at 122k gross income this person is either in 25% bracket married or 28% bracket single/married filing seperate.

Even if taxes "go up", let's remember the basics-

75% of americans pay taxes in 15% bracket or lower.
This person is in other 25% of taxpayers NOW.

Taxes do get raised, and they would be raised on the upper 25% before the lower 75%.

In retirement, it is very easy to get into the lower 75%. Many states give more exemptions to retired people, some of income will be tax free, and expenses are usually lower. USUALLY.

I am banking on the "usually" when suggesting 401k now over Roth as tax advice. OP should take a 25% deduction or 28% deduction now and reduce taxes NOW because I don't know what the future holds, but if the tax code give you a deduction now TAKE IT at 25% or 28%. If OP is in 28% bracket, the 401k is one of few deductions they are eligible for anyway.

Then in a year where income is low, convert the 401k to a Roth. Meaning do not pay taxes when tax rates are 28%, pay them when they are 15%.

There will always be a tiered income tax system in the USA. Each day 10 new lines get added to the tax code- for anyone to unravel the tax code (to modify the tiered level we have now), it would take something close to an act of god (is that the mess we are in now- LOL?).

Example- OP accumulates $2-3 M in 401k over working career and calls it quits at age 54. Taxes at 25% now and they went up to 28% by time done working.

They can lower expenses by 20% when retired. No more mortgage, no work travel, down to one car for household. That lower level of expenses reduces tax rate from 28% to 20% (the 20% is the old 15%).

So even though tax rates went up on lowest income tax payers, it is still lower than the marginal bracket when working.

I would not choose an investment bucket based on what the government MIGHT do in the future. The government bailout might work. Are banking on the stimulous working? I am not- I am actually banking on the opposite.